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Better than expected festive trends should drive street earnings upgrade

After a strong revenue update in Oct-22, TITAN’s adjusted EBITDA for Q2 was in line with Street estimates. Reported EBITDA was 6-13% ahead of our/Street expectations, due to a 200bps one-off in the Jewelry segment. Jewelry momentum sustained, with 3Y CAGR of 27% in Q2, led by 6-7% expansion in transaction size, with the balance contributed by strong buyer growth. Share of new buyers also increased, to ~46% of total buyers in Q2 vs. 43% in Q1, pointing to market-share gains. Despite a high base, the strong trend endured in Q3TD, with 17-19% growth during the festive period vs. Street expectations of flat growth in H2. We believe this provides scope for a significant earnings upgrade for the Street and a potential re-rating for TITAN. With ~200bps higher studded mix, comparable jewelry margins improved ~30bps to 13.3%. TITAN targets EBIT margin of 12-13% for Jewelry, of 13-14% for Watches and >15% for Eyewear, over the next 12-18 months. TITAN has outperformed Nifty-50 index by 10-15pps over the last 6M/12M. Given a moderate 8% upside on our revised Dec’23E TP of 3,000, we expect the stock to be range bound in the near term. However, we maintain our Buy rating on Titan over a longer investment horizon, given continued potential for consistent earnings compounding, based on its modest market shares in several large and growing product categories. Our revised Dec’23 TP is based on a higher multiple of 53x (vs. 50x earlier). Upgrade in the valuation multiple is driven by 50bps increase in our medium-term growth expectations, on higher growth expectations in Taneira/ Handbags/International, as also higher long term sustainable RoE.

Result summary: The Jewelry division (ex-bullion) saw a strong 3-yr revenue CAGR of 27% (vs. 18-20% CAGR over the last three quarters), while the watches/eyewear segments saw relatively slower growth, at 4-5% CAGR. Further, Caratlane maintained its strong growth trajectory, with ~50% CAGR. On a positive note, studded grew faster at 25% vs. ~11% growth in plain gold sales, leading to 200bps higher studded mix. TITAN expects growth in watches /eyewear segments to also pick up, with strong traction in wearables/lenses, premiumization and new store additions. The strong network expansion continued, with addition of 105 net stores across segments (vs. ~100-125 in recent quarters), given 25/23/38/14 additions in Jewelry/Watches/Eyewear/Caratlane. Its FY23E store-addition target remains ambitious, with ~35 stores for Tanishq, 50-100 for Helios/Titan world and >250 stores for Eyewear (+35%).

Earnings-call KTAs: 1) Diamond prices have peaked, but remain elevated due to persistent supply constraints. 4) Titan indicated relatively slower growth in the economy-oriented price points due to inflationary pressures, while better growth is seen on the premium front. 5) With India-UAE CEPA agreement, Titan received the license to import 540kg of gold with 1% concession in import duty in Q2. Allocation is expected to further increase in Q3 6) TITAN targets Rs10bn worth of sales by FY27, for newly-launched women handwear brand IRTH.

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